CHAPTER 8 INVENTORIES: COST MEASUREMENT AND FLOW

Text Preview:
CHAPTER 8


               INVENTORIES: COST MEASUREMENT AND FLOW ASSUMPTIONS



CONTENT ANALYSIS OF EXERCISES AND PROBLEMS

                                                                             Time Range
 Number                                Content                                 (minutes)

 E8-1       Inventory. (Easy) Manufacturing company. Computation of             10-15
            ending account balances.

 E8-2       Goods in Transit. (Easy) FOB destination. FOB shipping point.        5-10
            Items included as inventory, cost assigned.

 E8-3       Items in Inventory. (Easy) Determine if numerous items should        5-10
            be included in inventory.

 E8-4       Inventory Valuation. (Moderate) Journal entries to record a          5-10
            rebate. Effect on inventory valuation.

 E8-5       Discounts. (Easy) Gross price and net price methods. Journal         5-15
            entries.

 E8-6       Discounts. (Moderate) Gross price and net price methods.             5-15
            Journal entries.

 E8-7       Inventory Methods. (Easy) Periodic system. Cost of goods sold       10-15
            and ending inventory under FIFO, LIFO, and average cost.

 E8-8       Inventory Methods. (Easy) Perpetual system. Cost of goods           15-25
            sold and ending inventory under FIFO, LIFO, and average cost.
            IFRS differences.

 E8-9       (AICPA adapted). Inventory Methods. (Moderate) Periodic             15-20
            system. Ending inventory under FIFO, LIFO, and weighted
            average.

 E8-10      LIFO. (Easy) Perpetual and periodic systems. Ending inventory,      10-15
            cost of goods sold.

 E8-11      Dollar-Value LIFO. (Easy) Determination of ending inventory at      10-15
            end of one year.

 E8-12      Dollar-Value LIFO. (Moderate) Determination of ending               10-20
            inventory for four years.

 E8-13      (AICPA adapted). Dollar-Value LIFO. (Moderate) Computation          10-20
            of year-end inventory for three years.

 E8-14      (AICPA adapted). Dollar-Value LIFO. (Moderate) Computation          10-20
            of year-end inventory for three years.

                                            8-1
                                                                            Time Range
Number                                Content                                 (minutes)

E8-15    Inventory Pools. (Moderate) Dollar-value LIFO. Computation of         20-30
         ending inventory.

E8-16    Use of Different Methods. (Easy) FIFO used internally, LIFO used      10-20
         externally. Journal entries to convert accounts. Comparative
         balance sheet disclosure. Difference in cost of goods sold.

E8-17    Interim Financial Reports. (Easy) LIFO. Accounting for inventory       5-10
         liquidation in different quarters. Worksheet entry.

E8-18    (Appendix). Exchange Gains and Losses. (Easy) Record journal           5-10
         entries for acquisition and payment.

E8-19    (Appendix). Exchange Gains and Losses. (Easy) Record journal           5-10
         entries for sale and collection.

P8-1     Items in Inventory. (Moderate) Analyze several transactions to        10-15
         determine if included in inventory.

P8-2     Valuation of Inventory. (Moderate) Adjustment of ending               10-20
         inventory value to account for transactions not considered.

P8-3     Cost of Sales. (Moderate) FIFO, LIFO, and average cost.               20-30
         Ending inventory, cost of goods sold (in units and dollars).

P8-4     Discounts. (Moderate) Gross price and net price methods.              20-30
         Income determination, journal entries.

P8-5     Inventory Methods. (Challenging) FIFO, LIFO, and average cost         25-35
         under periodic and perpetual systems. Cost of goods sold,
         ending inventory. Reconcile LIFO periodic and LIFO perpetual.
         IFRS differences.

P8-6     Inventory Methods. (Challenging) FIFO, LIFO, and average cost         30-40
         under periodic and perpetual systems. Cost of goods sold,
         ending inventory. Reconcile LIFO periodic and LIFO perpetual.
         Inventory turnover ratio and related issues.

P8-7     Inventory Methods. (Challenging) FIFO, LIFO, and average              30-45
         cost. Periodic. Gross profit determination. Return on assets
         and related issues.

P8-8     (AICPA adapted). LIFO and Inventory Pools. (Challenging)              20-30
         Computation of ending inventories and cost of goods sold.

P8-9     Dollar-Value LIFO. (Moderate) Determination of year-end               30-40
         inventory for five years. Prepare disclosures.

P8-10    Dollar-Value LIFO. (Moderate) Determination of year-end               20-30
         inventory for five years.

P8-11    Dollar-Value LIFO and Inventory Pools. (Challenging)                  30-40
         Computation of ending inventory--one pool and three pools.



                                           8-2
                                                                                     Time Range
 Number                                     Content                                    (minutes)

 P8-12         Comprehensive: Dollar-Value LIFO. (Challenging) Two pools.                30-40
               Compute cost indexes. Determine year-end inventory for 4
               years.

 P8-13         (AICPA adapted). Double-Extension: Dollar Value LIFO.                     30-40
               (Moderate) Multiple-pools. Compute internal conversion cost
               indexes. Compute year-end inventory for 2 years.

 P8-14         LIFO Liquidation Profit. (Moderate) Unit sales exceed unit                30-40
               purchases. Computation of LIFO liquidation profit. Determine
               effect on income taxes of additional purchases and use of
               LIFO. Prepare disclosures.

 P8-15         Comprehensive. (Moderate) Determination of ending                         20-30
               inventory. Cost of goods sold from purchases, from beginning
               inventory.

 P8-16         (AICPA adapted). Inventory Valuation. (Moderate) FIFO,                    20-30
               perpetual. Early year-end physical count. Inventory value
               determination.

 P8-17         (AICPA adapted). Comprehensive: Inventory Adjustments.                    25-35
               (Moderate) Preparation of schedule of adjustments to
               compute ending inventory, accounts payable, and sales.


ANSWERS TO QUESTIONS


Q8-1     A merchandising company purchases goods for resale and does not alter their
         physical form, so it needs only one type of inventory account, usually called
         Merchandise Inventory. A manufacturing company does change the physical form of
         the goods, and typically uses three inventory accounts in the financial statements to
         reflect the stage of completion. The three accounts are usually called: (1) Raw
         Materials Inventory; (2) Work in Process Inventory; and (3) Finished Goods Inventory.
         Both types of companies may use more accounts internally, and may combine
         account balances in their financial statements.

Q8-2     Raw materials inventory includes the tangible goods acquired for direct use in the
         production process.

         Work (or goods) in process inventory includes the products that have started in the
         manufacturing process but are not yet complete. The cost includes three
         components:

          1.   Raw materials that have entered into the production process,
          2.   Direct labor, which is the cost of the labor used directly in the manufacture of the
               product,




                                                 8-3
Q8-2 (continued)
        3.   Manufacturing (or factory) overhead, which includes the costs other than raw
             materials and direct labor that are part of the production of the product. These
             costs include variable manufacturing overhead, such as supplies and some
             indirect labor, and fixed manufacturing overhead, such as insurance, utilities, and
             depreciation on the assets used in the production process.
        Finished goods inventory includes the same three cost components as the goods in
        process inventory combined into a single cost per unit for all the completed units.

Q8-3    Under a perpetual inventory system, a company keeps a continuous record of the
        physical quantities in its inventory. It records every purchase, or production, and use of
        each item of inventory in detailed subsidiary records, sometimes in units only and
        sometimes with costs attached. A company maintains an Inventory account and a
        Cost of Goods Sold account as summary accounts on a current basis, so inventory and
        cost of goods sold are continually known.

        Under a periodic inventory system, a company periodically determines its inventory
        quantity and cost by a physical count of the goods on hand. It typically does not debit
        the costs of purchases to an inventory account, but to an account called Purchases.
        A company determines its cost of goods sold by adding the purchases for the period
        to beginning inventory (which is the ending inventory from the previous period) and
        subtracting ending inventory, which it calculates from an actual physical count at the
        end of the period.

        Use of the perpetual system does not eliminate the need for taking a physical inventory
        count. A physical count is taken periodically to confirm the balances in the perpetual
        records.

Q8-4    The general rule for determining whether a company includes an item in inventory is to
        include all items that are under the economic control of the company, regardless of
        their location or legal ownership. Goods in transit shipped F.O.B. destination are
        included in the inventory of the seller until they are received by the buyer, and are
        included in the inventory of the buyer when they are actually received. Goods in
        transit shipped F.O.B. shipping point are no longer included in the seller's inventory, and
        are included in the inventory of the buyer. Goods on consignment, plus the handling
        and shipping costs incurred in delivery to the consignee, are included at cost in the
        inventory of the consignor, since the consignor retains economic control.

Q8-5    a.   Goods in transit purchased F.O.B. shipping point for which the invoice has been
             received are included in the Raw Materials Inventory account since they are in
             transit and economic control has been transferred.
        b.   Raw materials are included in the Raw Materials Inventory account.
        c.   Since the consignor retains ownership (and control) of goods out on consignment,
             these are included in its Consignment-Out Inventory account.
        d.   Since economic control of goods shipped F.O.B. destination does not transfer to
             the purchaser until the goods are actually received, these are included in the
             inventory of the seller while in transit.
        e.   Manufacturing supplies may be included in Raw Materials Inventory, but could also
             be isolated in a separate account called Manufacturing Supplies, Factory Supplies,
             or Indirect Materials.



                                               8-4
Q8-6   a.   Sales commission are not included in the determination of inventory cost.

       b.   A supervisor's salary, if directly related to the production of inventory, is included in
            the determination of inventory cost.

       c.   Freight-in charges are included in inventory cost, unless they are the result of
            shipping errors, such as sending merchandise to the wrong warehouse and having
            it sent back. Freight-out charges are included in selling costs.

       d.   Indirect factory production labor, such as the salaries of machine maintenance
            personnel, is included in inventory cost if it can be allocated in a reasonable
            manner.

       e.   Storage costs are included in inventory cost.

       f.   The salaries of corporate executives are a period expense and are not included in
            the determination of inventory cost.

Q8-7   The gross price method, in which purchases are recorded at their gross price and
       discounts are only recorded when they are taken, is the easiest of the two methods to
       use. It results in an Accounts Payable balance that reflects the maximum liability
       resulting from the purchase. It has the disadvantage of hiding inefficiencies in the
       payment of Accounts Payable because discounts available but not taken are not
       known. Also, inconsistent costing of inventories occurs when discounts taken are
       treated as a reduction in inventory cost. Discounts lost, which result from inefficiencies
       in payment or poor cash flow control and add no value to inventory, are included in
       the cost of inventory under the gross price method.

       The net price method isolates the discounts lost, thereby highlighting inefficiencies. It
       also states the inventory at the cost management should expect to pay; that is, the
       invoice price less all available discounts. The net price method has the disadvantage
       of possibly understating Accounts Payable, since some discounts may be lost, thus
       causing Accounts Payable to be higher. However, proper adjusting entries will ensure
       that the correct liability appears on the financial statements.

Q8-8   GAAP requires that an inventory cost flow assumption be systematic, based on cost,
       and match costs as expenses against revenues appropriately. The assumed flow of
       costs does not represent the actual physical flow of goods.

       The LIFO method matches the most recent costs with revenues, and thereby excludes
       some of the holding gain from gross profit (income) since the most recent costs are
       closer to replacement cost. The LIFO method also results in lower gross profit (income)
       under conditions of rising costs, which produces the benefit of reduced cash payments
       for income taxes. LIFO may only be used for tax purposes if it is used for financial
       accounting purposes, and management may not want to show a lower gross profit
       (income) on financial statements.




                                                8-5
Download Link:
Share Link: Forum Link:

More on Business

  • Picture: Gr 10 Maths Literacy - Paper 1

    Gr 10 Maths Literacy – Paper 1

    File Size: 249.96 KB, Pages: 10, Views: 1,341,481 views

    GRADE 10 EXEMPLAR EXAMINATION NOVEMBER 2006 MATHEMATICS LITERACY PAPER 1 Minimum time: 1 hours Maximum time: 2 hours 75 marks PLEASE READ THE FOLLOWING CAREFULLY 1. This paper consists of: 5 questions an answer sheet with grid paper for question 4 (d). 2. Answer all …
  • Picture: Improving cash flow using credit management - CIMA

    Improving cash flow using credit management – CIMA

    File Size: 374.27 KB, Pages: 28, Views: 1,270,615 views

    Improving cash flow using credit management The outline case sponsored by Improving cash flow using credit management sponsored by Albany Software focuses on developing award-winning software to transform financial processes and is the market leader in electronic payment solutions. Albany makes financial transfers and subsequent …
  • Picture: MATERIAL SAFETY DATA SHEET - compressorparts.com

    MATERIAL SAFETY DATA SHEET – compressorparts.com

    File Size: 311.77 KB, Pages: 8, Views: 521,484 views

    Product Name: MOBIL RARUS SHC 1025 Revision Date: 16Feb2007 Page 1 of 8 _____________________________________________________________________________________________________________________ _ MATERIAL SAFETY DATA SHEET SECTION 1 PRODUCT AND COMPANY IDENTIFICATION PRODUCT Product Name: MOBIL RARUS SHC 1025 Product Description: Synthetic Base Stocks and Additives Product Code: 606343-00, 973764 Intended Use: …
  • Picture: Onan RV Generator Troubleshooting Guide - Flight Systems, Inc.

    Onan RV Generator Troubleshooting Guide – Flight Systems, Inc.

    File Size: 2,729.64 KB, Pages: 18, Views: 37,578 views

    RV GENERATOR TROUBLESHOOTING GUIDE A Service of FLIGHT SYSTEMS 207 Hempt Road Mechanicsburg, PA 17050 Ph: 717 590 7330 Fax: 717 590 7327 www.flightsystems.com CONTENTS RV Generator Troubleshooting Overview 1 RV Generator FAQs 5 Onan RV Generator Charts: Applications Chart 8 Test Information for Troubleshooting …
  • Picture: Interpretive Guide for the Achievement Levels Report (2003

    Interpretive Guide for the Achievement Levels Report (2003

    File Size: 624.72 KB, Pages: 19, Views: 38,999 views

    Interpretive Guide for the Achievement Levels Report (2003 Revision) ITBS/ITED Testing Program The purpose of this Interpretive Guide is to provide information to individuals who will use the Achievement Levels Report for monitoring the achievement of student grade groups, both at the building level and …

Leave a Reply

Your email address will not be published. Required fields are marked *